How can the national government use categorical grants to influence state policies?

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Fiscal federalism is the model of spending, taxing, and providing grants in the federal government system. The national government’s primary means of influencing state governments is giving money to states in the form of grants-in-aid. Grants-in-aid have a long history in the United States, dating back to the Confederation period. The nation’s leaders originally designed them to help fund agriculture, land grant colleges, and farm-related education. They grew to encompass many other types of funding such as public housing, urban development, and school lunch programs.

States often need funding from the federal government to implement projects and programs for citizens, but with federal funding comes the requirement of federal regulation. To use a common metaphor, the national government uses the need for fiscal assistance as both a carrot and a stick. The carrot is the federal dollars needed by the state, which come in the form of grants-in-aid. As citizens’ needs expand, the states look to the national government to assist in meeting the financial aspects of fulfilling those needs. The stick comes in the form of regulation and compliance with federal mandates to receive the money or to continue to obtain grants-in-aid. Regulations such as minimum wage, speed limits, and handicap accessibility are examples of “sticks,” or mandates, that states must comply with to receive the national funds.

States can choose to reject the regulations, but then they reject the funds as well. However, doing so puts the states in a position of not offering services to its constituents that may in turn put the state at a disadvantage in competing economically with citizens of other states. For example, if the national government requires states to lower speed limits on highways, and a state refuses, the national government may cut the state’s funding. As a result, the state’s highways may deteriorate. Poor roads may keep new industries from locating in the state, resulting in a decreased economic standing relative to other states that do accept the money and regulations that come with it.

Main types of grants-in-aid include categorical grants, formula grants, project grants, and block grants. Categorical grants are funds targeted for specific purposes such as roads, schools, and urban development. Although they help states meet public needs, they come with many stipulations and regulations. Formula grants give money according to a defined set of rules. For example, more urban development dollars go to states with higher urban populations. These grants stipulate eligibility and the amount recipients may receive. Project grants are competitive and can create economic opportunity for the states. Examples of project grants are water projects, government facilities, and research grants. Project grants tend to be less dictatorial, giving states more discretion over how the funds are spent. States receive block grants for general purposes and these grants commonly have even fewer restrictions, making them very desirable.

Another form of federal aid that was used in the past was the revenue-sharing program. The government gave a pool of federal tax collections to the states as “shared” money with virtually no restrictions. These types of grants were well received by the states; however, they were partially responsible for the huge federal deficits in the 1970’s and 1980’s. The Reagan Administration ended the revenue-sharing program in 1987.

Interest groups within the states compete to receive federal dollars. For example, federal highway dollars come with regulations on structure, signage, and driving restrictions that certain citizens may not favor, such as truckers, but law enforcement personnel, such as the highway patrol, may lobby for. City and state representatives like mayors, superintendents of schools, and governors do intergovernmental lobbying to compete for these dollars. Many states have a staff in Washington D.C. specifically to lobby for grants and to look after their state’s interests. The nation’s capital is also home to several organizations of governments, like the National League of Cities and the U.S. Conference of Mayors, which press for federal funding for their interests.

Although states compete to receive grants-in-aid, the regulations that come with them often weigh heavily on those that receive the funding. Conditions of aid are federal rules attached to grants that states must follow in order to receive funding. The costs and benefits of these rules can become a matter of argument between the states and the federal government.

One major condition of aid is funding, which varies depending on the type of grant (categorical, formula, project, or block). Sometimes the federal government requires the states to match the funds that it supplies to implement policies. This can lead to a large burden for state taxpayers. Many times, when Congress passes legislation without enough or any national funding to support them, they are deemed unfunded mandates. This type of legislation often places states in the difficult position of funding completely new programs in order to continue receiving national funds for existing programs. Some of the programs Congress issues unfunded mandates on include civil rights, poverty programs, and environmental issues.

The No Child Left Behind Act (NCLB) of 2001 is one example of an unfunded mandate. The goal of NCLB was to improve the performance of schools by increasing the standards of accountability for states, school districts, and schools. The main objection state officials have to NCLB is that it adds to the cost of education without providing any federal funding for new testing and monitoring programs. Because of this, several states have considered ending all federal money for education and rejecting the NCLB Act.

Devolution, which began during the Clinton Administration, is defined as the scaling back of the size and activities of the national government, placing the burden of a wide range of domestic programs on state governments. One prime example of devolution has occurred in the area of welfare. Congress introduced the Aid to Families with Dependent Children Act (AFDC) in 1935. This act guaranteed states funds to appropriate to poor families. AFDC was originally an entitlement program, but legislation of the 1990’s changed this, making welfare a block grant and placing the costs and the administration of the program in the hands of the states. Local governments experience second-order devolution when states give them powers over these domestic programs. For example, states can give county and city governments the duty of managing certain aspects of welfare. This pattern can spill into third-order devolution, where nonprofit organizations and private groups also pick up their share of responsibility for the programs, as the issue of welfare has demonstrated.

Federalism has evolved throughout the course of American history. In the nineteenth century, dual federalism described the relationship between functions of state and national government. Beginning in the 1930’s, the nation moved toward cooperative federalism, evidenced by greater federal assistance and regulation through grants-in-aid. In the latter half of the twentieth century, federalism has entered a third stage of the evolution where the national government has coerced states under threat of withholding funds and issuing unfunded mandates. Some speculate that a fourth stage is dawning—one that returns considerable power to the states.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education

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